| The literature on earnings management has witnessed a large number of studies that examine the presence of earnings management in situations where motivations to manage earnings are strong (Liberty and Zimmerman (1985), DeAngelo (1986), Perry & Williams (1994), Wu (1997), Easterwood (1997), Erickson and Wong (1999), DeFond & Subramanyam (1998), among others). This dissertation contributes to the literature by pointing out that a stock repurchase creates a situation where motivations for earnings management are present. A careful analysis is performed to ascertain if earnings management actually takes place around share repurchases. In spite of the incentives for earnings management, there is, on average, no indication of significant earnings management. Nevertheless, an inverse relation is documented between the extent to which earnings are managed and the market reaction to the repurchase announcement, suggesting that firms with more (less) severe earnings management experience a stronger (weaker) stock market reaction. The empirical evidence implies that firms whose stocks are priced further (less) out of equilibrium before the repurchase are expected to experience a greater (less) ultimate price correction. As a result, the market reacts more positively (negatively) to firms with more negative (positive) earnings management prior to the repurchase. |
